The recent Court of Appeals decision in the United Kingdom has confirmed that the sale of gray market goods can bring about criminal sanctions under UK trademark laws. According to a decision from earlier this month, the Court of Appeals Criminal Division held that the sale of gray market goods (or parallel imports, as they are sometimes known) – genuine goods purchased outside a manufacturer's intended chain of distribution and imported to compete with authorized domestic sales, generally at lower prices – is not merely a civil offense but a criminal one. Not merely a trivial ruling, this distinction means that offenders could face a sentence of 10 years’ imprisonment.

The case centers on the legality of the sale of authentic Ralph Lauren, Adidas, Under Armour, Jack Wills, and Fred Perry garments and accessories by parties that were not authorized to do so by the aforementioned brands. According to the plaintiffs’ complaint, the defendants were “engaged in the United Kingdom in importing and selling branded goods which were both manufactured and [initially] sold with the authorization of the [plaintiffs] in a country outside the European Union.”

The plaintiffs further allege that “these include, or may include, goods which had been part of an order placed with an authorized manufacturer by the trade mark proprietor but then cancelled; goods part of a batch whose manufacture had been authorized but which, after manufacture, were rejected as not being of sufficient standard; or goods manufactured, pursuant to an order, with authority but in excess of the required amount.”

Because the goods at issue were largely authentic, the issue was not one of trademark infringement or counterfeiting, in which an individual would only be held liable if the goods are counterfeit goods – aka if they feature a mark made to look identical to or substantially indistinguishable from an actual, federally registered trademark, with the intention of causing consumer confusion about the source of the counterfeit goods or services. Here, the case, instead, focused on whether or not an individual can be held criminally liable for selling gray market – authentic, yet questionably obtained and resold – goods.

In particular, the court was faced with the question: “Can a criminal offense be committed under s. 92(1)(b) or (c) of the Trade Marks Act 1994 (the statute that governs trademark infringement) where the [holder] of the registered trademark has given its consent to the application of the registered trademark to the goods, but has not given its consent to the sale, distribution or possession of them?"

CRIMINAL LIABILITY AND GRAY MARKET GOODS IN THE UK

While liability (or lack thereof) for the sale of gray market goods in the U.S. has largely come from civil statutes (namely, copyright and trademark doctrines), the court here found that criminal liability may be the appropriate body of law.

According to the court, “Trademark violation gravely undermines the value of a brand and affects legitimate trade. The very fact of a cheap sale of an unauthorized branded item can both dupe a customer and diminish the market and overall value of the trademark, in terms of perception of quality and exclusivity.” Writing for the court, Judge Rook continued on to state: “In some cases moreover (for example, electrical goods or toys) very real issues of public health and safety can arise where the goods are fake or, even if originally manufactured with the trade mark proprietor's authorization, are then rejected as sub-standard but nevertheless sold on without authorization.”

With this in mind, Rook stated that he aimed to balance “the often unscrupulous conduct of some of those determined to exploit their own advantage and the detriment of proprietors and consumers.” Looking to “the wording of Section 92; (2) earlier legal authority; (3) public policy,” Rook held that the wording “a sign identical to, or likely to be mistaken for a registered trademark” in Section 92 clearly includes circumstances where the registered mark itself has been applied, whether with or without the proprietor’s consent.

In terms of the second point, previous authority, the court reviewed the leading textbook on trademarks, Kerly’s Law of Trade Marks, which outlined that s. 92 has a broad application and is capable of extending to gray market goods. Furthermore, the recent decision of Genis [2015] EWCA Crim 2043 was a binding authority, outlining that a conviction was safe even where a mark had initially been applied with the proprietor’s consent.

Finally, the court held that public policy crucially highlighted how a cheap sale of an unauthorized brand can serve both to dupe a customer, diminish the mark and overall value of the trade mark and explained that a “very real issue of public health and safety [which] can arise where the goods are rejected as substandard but nevertheless sold without authorization.”

While Judge Rook acknowledged that the decision to extend criminal liability to the sale of gray market goods may lead to tough outcomes in certain cases, the high burden of proof to establish a criminal offense and the fact that criminal sanctions are not applied when individuals have acted honestly and reasonably, will provide a sound balance.

US CASE LAW

In the United States, the importation of gray market goods is not per se unlawful due to the "first-sale doctrine," which provides that once a trademark owner releases its goods into commerce, it cannot prevent the subsequent re-sale of those goods by others.

In March 2013, the Supreme Court held that U.S. companies that make and sell products abroad cannot prevent those items from being resold in the U.S. The case – Kirtsaeng v. John Wiley & Sons, Inc. – involved the importation and subsequent unauthorized sale of foreign-made textbooks and whether that was a violation of copyright law in the U.S. Writing for the majority, Justice Breyer held that there was no geographic restriction on the "first sale" doctrine, which states an individual who knowingly purchases a copy of a copyrighted work from the copyright holder receives the right to sell, display or otherwise dispose of that particular copy, notwithstanding the interests of the copyright owner.

In short: a copyright holder cannot rely on the U.S. Copyright Act to prevent the unauthorized importation of copies of works, even if they have been manufactured abroad.

However, more on point with the case at hand however, which involves the sale of trademark-protected goods, is the general rule that gray market imports can be unlawful when "material differences" exist between such imports and the authorized goods, based on the core principle in U.S. trademark law of preventing consumer confusion.

In accordance with U.S. law, as long as the material differences are likely to influence consumers' purchasing decisions, an authorized U.S. distributor should be able to take action against gray market imports.